Fresh doubt on Japanese Consumption Tax rise

New concerns have arisen in the past few days on the resolve of the Japanese government to push forward with the first stage of the doubling of Japanese Consumption Tax to 10%. Whilst the economy is strengthening, politicians are still nervous of the damage to the recovery and a popular backlash.

Japanese Consumption Tax to rise from 5% to 10% by 2015

Japan’s VAT – Consumption Tax – at 5% is extremely low compared to the average EU VAT rate of over 21%. China VAT is 17%, and Australian GST is 10%.

Japan announced it would double Consumption Tax in 2012 to help combat the costs of a rapidly aging population, and to control the high sovereign debt level. There had been discussions about such a rise for many years but there had never been a strong enough political mandate. The last premier, Noda, fell when he tried a similar fiscal hike.

No Consumption Tax rise decision till the Autumn

The Japanese government is now clearly looking to leave any final decision till as late as possible – which will be the autumn. This means early September when the second quarter GDP figures are out. It is nervous about derailing the first serious economic recovery in Japan in over 15 years, and is finally conquering the deflation problem. Many economists say the economy is still too fragile.

The current plan is to raise the tax to 8% in April 2014, and then to 10% in 2015.

Any change to this plan would unsettle the financial markets which are concerned as to the long term financial position of Japan. Since Japan has over 200% debt to GDP, it is the most indebted country amongst the advanced countries. Currently, Japan enjoys very low borrowing costs, partly based on the promise to raise Consumption Tax.

Delay Japan's VAT rise

An alternative plan now under discussion would include raising the tax by 1% per annum for five years.

VP Global Indirect Tax

Richard Asquith

VP Global Indirect TaxRichard Asquith

Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.